Michael McGrath (Cork South Central, Fianna Fail)
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69. To ask the Minister for Finance his views on the Pension Outlook 2018 report of the OECD released on 3 December 2018; his further views on the concerns in the report on approved retirement funds; and if he will make a statement on the matter. [2224/19]

Paschal Donohoe (Dublin Central, Fine Gael)
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The OECD Pensions Outlook 2018 provides comprehensive analysis and insight into the challenges facing developed nations that must design and apply appropriate pension policies to best meet the needs of their existing and future older populations.

My colleague the Minister for Employment Affairs & Social Protection outlined last year this Government's approach to reforming all aspects of pension provision in the Roadmap for Pensions Reform 2018-2023 (the Roadmap).

As the Deputy will be aware, my Department chairs the Interdepartmental Pensions Reform and Taxation Group (IDPRTG), which is currently undertaking a review of a range of pension issues assigned to it in the Roadmap, including a review of the Approved Retirement Fund (ARF). Some of these issues are discussed in general in the OECD report, including the design of financial incentives and drawdown products and the IDPRTG will consider this work in completing its report.

ARFs were introduced in Finance Act 1999 to provide control, flexibility and choice to the holders of personal pension plans and proprietary director members of occupational pension schemes in the drawdown of their retirement benefits. Prior to that Act, any person taking a pension from a defined contribution (DC) scheme or a Retirement Annuity Contract had to purchase an annuity with their remaining pension pot after drawing down the permissible retirement lump sum. These options have since been extended to the benefits taken by any individual from DC pension arrangements generally.

An internal review of tax relief for pension provision, undertaken by my Department and Revenue in 2005, found that the ARF option was largely not being used to fund an income stream in retirement as was intended, but rather was being us to build up funds in a tax-free environment over the long-term. To counteract this, Finance Act 2006 introduced, with effect from 2007, an imputed or notional distribution of 3% of the value of the assets of an ARF where the ARF owner is 60 years or over for the whole of a tax year. This was phased in from 2007 to 2009: 1% in 2007; 2% in 2008; and 3% from 2009. The notional amount is taxed at the ARF owner's marginal income tax rate. Funds actually drawn down by ARF owners are credited against the imputed distribution in that year to arrive at a net imputed amount, if any, for the year. Finance Acts 2011 and 2012 increased the rate of the notional distribution to 5%, and 6% in respect of ARFs with values over €2 million.

To reduce the risk that individuals in the age group 60 to 70 years might out-live their ARF funds, Finance Act 2014 reduced the 5% rate to 4% for ARF owners under the age of 70, where the value of assets in their ARF is €2 million or less.

While most ARF owners take drawdowns at least equal to the notional distribution rate, there is no obligation on them to do so. The requirement in the legislation is not a statutory minimum drawdown condition. The only requirement is that tax is paid from the ARF on either the notional drawdown amount, whether it is drawn down or not, or on the amount actually drawn down if that is greater than the notional amount.

It is important to note that on drawdown of retirement benefits, the decision regarding the purchase of an annuity or an ARF is a decision made by an individual based on that individual’s specific requirements for retirement. Due to the current perceived poor value in annuities, ARFs are often a more popular post-retirement choice.

It is also important that we protect the integrity of our Exempt, Exempt, Taxed (EET) approach to pension taxation by ensuring income is drawn down in retirement. Our system of pension tax relief ensures contributions and investment returns are exempted from tax and the pension drawdown amount is subject to tax. As stated previously, the IDPRTG, as part of its overall work is currently conducting a broad review of the utilisation of the ARF option, which in conjunction with its other work will inform future policy in this area.